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POLICY: Legal Perspective on Non-competition and Protection of Commercial Secrets
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alt It has been proved by the rise in the number of rights infringement cases involving commercial secrets that human resource flow has become the most significant way of losing commercial secrets. On the other hand, freedom of employment is one of the important legal entitlements of labourers. To balance the interests of the obligated, obligors and other parties involved in the agreement regarding commercial secrets will be recognised as having great significance in terms of facilitating human resource development.
In the legal system of P. R. China, there exists a difference between statutory non-competition restriction and agreed non-competition restriction, and in our civil commercial sphere, the concept of commercial secret is touched upon both by the competition law and labour law fields. When there is an overlap between non-competition and a commercial secret, the question of how to protect commercial secrets more effectively by employing non-competition restrictions starts to attract people’s attention. The “Labour Contract Law of P. R. China” which was promulgated on 1 January, 2008 has been a major improvement with respect to the non-competition system under the protection of commercial secrets, whereby it provides some comparatively more clarified stipulations, and such has also brought us to reach a higher level concerning our perspectives on non-competition as well as the protection of commercial secrets.  
Under the Labour Contract Law, it is clearly stated in Article 23 that, “employer and employee may draw up terms in their employment contract regarding the relevant issues on protecting the employer’s commercial secrets. For a labourer who is bound by an obligation of secret maintenance, the employer may insert terms regarding non-competition in the secret maintenance agreement concluded between the parties, and it shall be stipulated that the employer shall pay the employee concerned with economic compensation on a monthly basis within the non-competition period after the dissolution or termination of the employment contract. If a labourer has violated such non-competition terms, then he/she shall compensate the employer with liquidated damage as prescribed.” Below are some practical points that I’d like to offer:
First of all, it is necessary to figure out what the effects of non-competition and commercial secrets are exactly within the legal domain. Non-competition refers to an obligation which forbids a specific person from practicing certain businesses with a competitive nature after his/her departure. For instance, it can be stipulated between an employer and an employee that the employee shall not undertake the same business in a corporation of a competitive nature within two years after his/her departure, yet corporations should compensate such employees at a certain amount; senior managerial personnel shall not help others or themselves to acquire business opportunities which should have belonged to the company, by means of his/her convenience at the post, or be operating the same businesses as they had been serving in the last employer. Commercial secrets refer to any tangible or intangible assets that have an economic value to the obligee, and which have been preserved by the obligee by some certain means.
Secondly, it is necessary to state who is capable of signing a commercial secret agreement, and who is capable of signing a non-competition agreement. In the legal sphere, regarding non-competition, the subject concerned as the keeper of commercial secrets should also be concerned as the one who is under the statutory obligation in terms of non-competition, and this means that, even though there was no commercial secrets maintenance agreement or terms concluded, the statutory subject is required by law to maintain confidentiality regarding all commercial secrets involved whatsoever until these commercial secrets are being opened to the public or have ceased to be commercial for other reasons. An agreed subject bound by non-competition is different from the that which is subject under a commercial secrets maintaining agreement to a certain extent, in accordance with the relevant provisions under the Labour Contract Law. The personnel who are considered to be obliged by non-competition are only limited to senior managerial persons, senior technicians and persons with a secret maintenance obligation, and thus the legislator is to prevent non-competition from being abused by employers in order to preserve the ordered flow of labourers, ensure the freedom of employment of labourers, whilst also restricting the bodies who are able to draw up a non-competition agreement. In practice, there are a certain number of employers who have signed non-competition agreements with all labourers whatsoever, which have all been ruled as invalid in arbitrations. In the meantime, there also exist some employers who intentionally require certain employees who are not even connected to commercial secrets to sign secrets maintenance agreements in order to make such that employees are bound by an obligation to maintain secrets concerning such cases. If the courts or arbitration committees conclude that the secrets which the employees are required to keep are not commercial in nature, then such agreements would be also recognised as void. 
Finally, is it useful to draw up terms regarding the case whereby employers have paid employees with compensation for non-competition during their service period, and therefore require them to be bound by the obligation of non-competition after their departure? As per Article 23 of the Labour Contract Law, such stipulations or agreements shall be deemed as ineffective; at least it is imperfect in the legal dimension. For instance, if a two-year non-competition period has been agreed between an employer and an employee, and in fact this employee only served for 6 months where he has only been paid for 6-months worth of non-competition compensation,  does this employee have to be bound by the 2-year non-competition agreement? Considering this point, it has been provided by the Labour Contract Law that non-competition compensation shall be paid within the period of non-competition agreed after the termination or dissolution of the employment contract.
 Last but not the least, there are some points concerning the improvement and refinement of our legal system regarding the non-competition mechanism and the system with respect to the protection of commercial secrets. In other words, there are still some imperfections which we have to consider in a careful manner. For instance, it is indeed necessary to refine our regulation regarding the formulation of non-competition agreements. For this point, we have to notice the fact that the law does not give a clear standard procedure for the payment of non-competition compensation, which means that it is apparently difficult or even impossible to judge whether compensation paid out is actually at a rational and fair level. Without a clear standard, the compensation payment will almost certainly be deemed as fair. 
Therefore, in order to achieve fairness, equality and freewill, it is important to recognise the significance of establishing a more refined system with respect to non-competition restrictions and the protection of commercial secrets.

By SImon Bai
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